Bryan Frith | November 20, 2008 Article from: The Australian
Agreements held
B&B has rightly come under heavy criticism in recent months in relation to long-term management agreements it holds with many of its listed offshoots that enable it to continue to receive bloated fees even if it is removed as the responsible entity (RE) for those offshoots. It is now poised to demonstrate the inequity of those arrangements by passing over to Lend Lease its management rights to Babcock & Brown Communities (BBC) without having to seek prior approval of the security holders.
It's all part of a complex package in which Lend Lease will inject $170 million into BBC (recapitalising the fund) and emerge with a holding of at least 41 per cent of the fund. Lend Lease proposes also to sell seven of its retirement villages to BBC for $133.4 million, funded largely through notes issued by the fund. And it will pay the head company, B&B, $66.8 million ($49.3 million for its 12.5 per cent stake in BBC and $17.5 million for the management rights).
BBC had said earlier if it didn't receive a suitable takeover offer it would internalise management by buying the management rights from B&B for $17.5 million.
Lend Lease will take placement of BBC securities at 68c a share and B&B will sell its stake at an average 58c a share. When the deal was announced BBC securities were at 41.5c. BBC will need security holder approval for the sale of B&B's holding to Lend Lease, the acquisition of the villages from Lend Lease and the replacement of the RE by a subsidiary of Lend Lease. But that's shutting the gate after the horse has bolted because Lend Lease will already have the management rights, which have at least another nine years to run. REs were established several years ago to combine the function of manager and trustee, and security holder approval is required if the RE wishes to retire in favour of another party or the unit holders want to replace the RE.
Security holders may legitimately query the purpose of having an RE if the management rights can be granted to another party and the holders have no say in the matter, or in the transfer of those rights. Arguably, it subverts the intentions of the Corporations Act provisions in relation to REs.
The Lend Lease proposal cut across a proportional partial offer from Prime Trust of 40c a security for 40 per cent of BBC. Prime is agitating against the Lend Lease proposal and is seeking unit holder support to requisition BBC for a security holder vote to instead require the fund to pursue internalisation for a "one-off" payment of $17.5 million.
Prime also took BBC to the panel and forced the fund to undertake to seek security approval prior to handing over the management rights to Lend Lease if a "superior" proposal was received before November 17. The panel considered that novation of the management rights would be likely to preclude an auction for control and it's clear it would have made a declaration of unacceptable circumstances but for the undertaking from BBC.
However, the BBC board declared it considered Prime's offer was not superior to that of Lend Lease. The November 17 deadline was reached on Monday and Prime returned to the panel seeking it to force BBC to declare its offer to be superior. However, the panel declined.
BBC is now free to proceed and conclusion of the deal must be imminent.
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